Why do some companies pay so much more than others?

Why top companies pay top wages

Takeaway: High-paying firms owe their wage premia to product market dominance and profit-sharing with employees, demonstrating that collective bargaining power can counteract corporate market power to improve economic welfare.

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Key Points

• Profit-Sharing Drives Pay: High-wage firms do not just have higher productivity; they charge higher prices and higher markups, sharing a portion of these product market profits with their employees.

• Product Dominance Harms Welfare Most: Corporate product market power (monopoly/markups) accounts for over 80 percent of the total economic efficiency losses caused by firm market power, far exceeding distortions from labor market power (monopsony).

• Bargaining Counteracts Market Power: Stronger worker collective bargaining leverage increases overall employment and economic welfare by compelling firms to expand production, though bargaining alone cannot eliminate all market distortions.

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Overview

Why do two workers with identical skills and experience earn vastly different paychecks depending on where they work? Why do modern "superstar" companies pay significant wage premia, and does giving workers more bargaining leverage help or hurt the overall economy?

In traditional economic models, higher pay comes almost entirely from higher worker productivity. However, in today’s economy, large firms frequently dominate both consumer markets and local hiring pools. Understanding whether firm wage premia stem from superior technology, market power, or union negotiations is vital for designing smart policies around antitrust, minimum wage, and labor rights.

Economist Horng Chern Wong investigated these questions by building a structural economic model that separates three distinct forces shaping pay:

1. Product market power (a firm's ability to charge high markups).

2. Labor market power or monopsony (a firm's ability to keep wages low due to lack of local job competition).

3. Collective bargaining power (workers' ability to negotiate a slice of firm profits).

To test the model, Wong analyzed administrative micro-data from French manufacturing firms, combining matched employer-employee records, detailed balance sheets, and product-level output prices.

Findings

Wong's analysis uncovered two empirical facts that standard economic models struggle to explain: high-wage firms charge higher output prices and markups, and they pay workers a larger share of the revenue generated by their labor.

Standard monopsony models assume firms operate in perfectly competitive product markets where higher pay naturally reduces profit margins. Wong shows that when workers hold collective bargaining power, they capture a share of product market profits ("rent-sharing"). High markups can act as a double-edged sword: while they restrict overall labor demand by limiting output, they also generate corporate profits that unionized workers can negotiate into higher pay.

Quantitatively, the study reveals that corporate market power creates substantial economic drag, reducing overall welfare by 46 percent in consumption-equivalent terms. Product markups account for more than 80 percent of this loss, largely because misallocation occurs when dominant firms restrict output.

Strengthening worker bargaining power helps offset these losses. When workers bargain collectively, they force profit-heavy firms to expand production and hiring, counteracting the firm's incentive to restrict output. Increasing worker bargaining power from 12 percent to 50 percent yields significant economy-wide wage gains and boosts welfare by 10 percent.

Context

However, worker power is not a total remedy. Even granting workers 100 percent bargaining power closes less than one-third of the efficiency gap relative to a perfectly efficient economy. This is because labor bargaining cannot fix how high markups distort a firm's spending on non-labor inputs, such as equipment and raw materials.

Methodologically, the study highlights that measuring labor input in actual hours worked rather than headcounts is critical. Headcount measures understate labor market power because larger, high-paying firms tend to demand longer work hours from their staff. Finally, because the empirical analysis focuses on French manufacturing firms under formal union structure, the exact magnitude of profit-sharing may differ in service-oriented or non-unionized economies.

Why it Matters

For policymakers and economists, these findings demonstrate that labor market policy and antitrust policy cannot be designed in isolation. Strong worker bargaining leverage does not merely redistribute wealth from capital to labor—it actively corrects output restrictions caused by corporate monopolies, leading to higher aggregate employment and greater economic efficiency.

Learn More

• Paper Title: Understanding High-Wage Firms: Monopoly, Monopsony, and Bargaining Power

• Author: Horng Chern Wong

• Journal: American Economic Review

• Publication Year: 2026

Econ Today Explains

Economic Concept: The Labor Wedge

The "labor wedge" is the gap between the economic value a worker creates for a firm with an additional hour of labor (their marginal revenue product) and the hourly wage they actually receive.

In a perfectly competitive textbook market, wages equal the worker's marginal revenue product, resulting in a labor wedge of zero. In reality, market power distorts this balance. A firm with monopsony power (few hiring competitors) suppresses wages below productivity, widening the labor wedge. Conversely, when a firm enjoys high price markups in consumer markets and workers possess collective bargaining power, workers can negotiate a share of those corporate profits. This rent-sharing increases pay relative to productivity, shrinking the labor wedge and bringing labor market outcomes closer to economic efficiency.

This article was written by AI but reviewed by a real human.